Perkins Loans

Perkins loans are disbursed directly to the student by the college or university where the student is attending.

Because of the school having control over the purse strings, Perkins loans are also considered a form of campus-based aid. Often, the school disburses the loan in two payments during an academic year.

Borrowing limits for the 2005-2006 academic year for undergraduates is $4,000 a year and $20,000 in aggregate. For graduates, borrowing limits are $6,000 and $40,000, respectively. The $40,000 borrowing limit includes any Perkins loans received for undergraduate study.

Like Pell grants, SEOGs and Stafford loans, Perkins loans require the student to complete a Free Application for Federal Student Aid (FAFSA). However, Perkins loans are more competitive than Stafford loans because:

Relative scarcity of subsidies. The federal government subsidizes the interest on Perkins loans (and subsidized Stafford loans) while students are in school. Since the federal government's budget is limited for these programs, the loan dollars are relatively scarce. Unsubsidized Stafford loans are also made by private lenders, making these loans relatively plentiful.

Interest-free loans until loan repayment begins. From the student's or parent's perspective, a subsidized Perkins loan is more attractive simply because it is a free loan. Students aren't charged interest on a Perkins loan until the loan repayment period begins. Borrowers of unsubsidized Stafford loans owe interest from the beginning of the loan period (when the loan is disbursed).

A Perkins (or other federal) student loan may be cancelled under certain circumstances. For example, if the student dies or is completely and permanently disabled, the government cancels the full amount of debt.

Other cases for receiving partial or full debt cancellation include military and corrections service; teaching in teacher-shortage areas or schools for low-income children; and certain cases of personal bankruptcy. You should check with the U.S. Department of Education (DOE) to learn more about canceling student debt.

As a result of the 2001 tax law, you can take a deduction for interest expense paid on student loans over the entire loan term. (Previously, you were limited to taking a deduction during the first 60 months of the loan term.)

The new law also increases the income limits for taking this deduction. In 2006, for taxpayers filing a single return, your allowable deduction begins to phase out when your modified adjusted gross income (MAGI) reaches $50,000. The allowable student-interest deduction phases out completely when your MAGI reaches $65,000. For married taxpayers filing a joint return, the increased income limits are $100,000 and $130,000, respectively for 2006.

To take a student loan interest deduction, enter the amount of the deduction on line 33 of IRS Form 1040. If your income falls within the income limits shown above, see IRS Pub. 970 to calculate a partial deduction.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.